The Bank of England has increased interest rates to their highest level for nearly 10 years and said further “gradual” rises are on the cards.
Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to raise the base rate from 0.5% to 0.75% after the economy bounced back as expected from a snow-hit start to the year.
The move sees rates rise above the emergency low of 0.5% for the first time since March 2009 and marks only the second hike since the financial crisis, after last November’s quarter-point increase.
Mark Carney, Governor of the Bank of England, said rates would need to rise further to bring inflation back to the 2% target over the next few years, but stressed hikes would be “limited” and “gradual”.
“Policy needs to walk – not run,” he said.
Millions of borrowers on variable rate mortgages will be affected by the latest hike, with a quarter-point rise adding around £16 a month or £190 a year to the average mortgage.
But it will offer some relief to savers, who have seen their nest eggs decimated by above-target inflation and negligible returns.
The Bank had backed away from a rate rise earlier this year after growth slowed down sharply to 0.2% in the first quarter, but said the economy had recovered as predicted.
It forecasts that growth rebounded to 0.4% in the second quarter, with data pointing to a similar rate of growth between July and September.
Mr Carney said: “UK growth in the second quarter is estimated to have rebounded as expected, consistent with the MPC’s judgment that the slowdown in the first quarter reflected the weather not the economic climate.”
In its accompanying quarterly inflation report, the Bank kept its forecast for growth this year unchanged at 1.4%, but increased the outlook for 2019 to 1.8% from the 1.7% previously predicted.
The report showed its predictions are based on financial market expectations for rates to rise to 1.1% by mid-2021, which would suggest two more quarter-point rises, with the next not until next May.
But it also said inflation – currently running at 2.4% – was set to rise slightly higher than it had predicted in May’s set of forecasts after recent falls in the value of the pound and higher energy prices.
Mr Carney said Brexit was a cloud on the horizon, but added the bank is “well prepared for whatever path the economy takes, including a wide range of potential Brexit outcomes”.
He said: “The MPC will respond to any persistent change in the outlook to bring inflation sustainably back to the 2% target while supporting jobs and activity.”
The pound fell 0.5% against the US dollar and 0.2% versus the euro, despite the rate rise and unexpected unanimous backing of the MPC for the move.
James Smith, an economist at ING, said: “Despite the Bank’s optimistic outlook, we think policymakers will find it tricky to hike rates again before Brexit. We don’t expect another rate rise before May 2019.”
Samuel Tombs, at Pantheon Macroeconomics, added that while Brexit is likely to delay another imminent rise, “we expect the economy to regain some momentum next year following a soft Brexit outcome, enabling the MPC to raise Bank rate twice in both 2019 and 2020”.